Aberdeen Equity Income Trust plc

Half Yearly Report 31 March 2026

Legal Entity Identifier (LEI): 21380015XPT7BZISSQ74

Equity income using an index-agnostic approach focusing on our best ideas across the market cap spectrum

The Company

Aberdeen Equity Income Trust plc (the "Company") is a closed-end investment company, and its shares are traded on the London Stock Exchange ("LSE").

The Company offers an actively managed portfolio of predominantly UK listed companies. The investment approach is index-agnostic and focuses on our best ideas from across the market cap spectrum.

Investment Objective

The Company's objective is to provide shareholders with a progressive dividend and long-term capital growth from a portfolio invested predominantly in UK listed equities.

Performance Highlights

Investment Portfolio by Sector as at 31 March 2026

Financial Calendar, Dividends and Highlights

Financial Highlights

 "In the six months to 31 March 2026, the Company delivered a strong net asset value total return of 9.9% which outperformed the total return of the FTSE All-Share Index."

Sarika Patel, Chair​

Chair's Statement

The most significant event during the period was the successful completion of the merger with Shires Income PLC ("Shires"). I would like to extend a warm welcome to our new shareholders and thank both them and our existing investors for their strong support throughout the process.

The merger, announced on 8 January 2026 and completed on 17 March 2026, has resulted in an increase of £120 million in the investment portfolio and an increase of almost 55% in the number of shares in issue. Net assets are now over £300 million, and trading volumes are higher. In 2025, up to the day before the announcement, average daily volumes were just over 100,000 per day; since the completion, the average has increased to over 174,000 shares per day. The merger also strengthens the Company strategically, bringing a broader and more diversified portfolio and greater scale which should result in a lower ongoing charges ratio for shareholders. The Board was particularly encouraged that holders of only 3.6% of Shires' shares, elected for the cash option reflecting strong alignment with the combined entity. The Board and the Managers are committed to delivering for all the expanded shareholder base.

On behalf of the Board, I would like to thank the Board of Shires for the faith that they have put in the Company in recommending the merger to its shareholders and to the teams from Aberdeen, JP Morgan Cazenove, Winterflood Investment Trusts and Gowlings who guided both Boards through the complex process.

Performance

In the six months to 31 March 2026, the Company delivered a strong net asset value ("NAV") total return of 9.9%, outperforming the total return of the FTSE All-Share Index of 8.9%. The share price total return was 4.7%.

The returns were even stronger in the five months to the end of February 2026 but moderated in March as markets reacted to the Iran war. This contributed to higher energy prices and renewed inflation concerns. This environment led to weaker performance across UK equities during the final month of the period, particularly among income‑oriented stocks.

The Investment Managers' Report provides a more detailed explanation of the drivers of this performance. Following the merger, Iain Pyle joined Thomas Moore as co-manager of the investment portfolio, strengthening the breadth and depth of the team, and providing greater resilience to the investment team.

Revenue

Revenue income in the six months to 31 March 2026 increased by 14.6% to £6.2 million, compared to £5.4 million for the same period last year. After interest costs and tax, net revenue earnings were up 19.7% at £5.8 million with the revenue per Ordinary share at 11.23 pence compared to 10.17 pence for the same period in 2025.  The net revenue income is enhanced by the waiving of £0.3 million management fees attributable to revenue by Aberdeen as part of the merger agreement. This flows through to the Ongoing Charges Ratio ("OCR") which is estimated to be 0.45% for the current year. In the absence of the management fee waiver and the OCR cap negotiated with Aberdeen as part of the merger, the OCR would be around 0.81%, as compared to 0.84% for the year to 30 September 2025. However, Aberdeen have agreed to reduce their annual management fee in future years to ensure that the OCR does not exceed 0.78%.

Dividends

The Board declared its plans for the dividend for the current financial year in last year's annual report and the proposed schedule is unchanged at this time. The Company currently intends to pay three interim dividends for the current year of 5.70 pence per Ordinary Share. The first interim dividend was paid to Shareholders on 27 March 2026, with the second and third payments expected in June and September.  The Board announced on 19 May 2026 that the second interim dividend of 5.70 pence per Ordinary Share will be paid on 26 June 2026 to shareholders on the register on 29 May 2026 with an associated ex-dividend date of 28 May 2026. The fourth interim dividend will be determined towards the end of the year. The Board's current expectation remains for a fourth interim of at least 6.00 pence per Ordinary Share, making a total payment for the year of at least 23.1 pence per Ordinary Share. 

Gearing

At 31 March 2026, the Company had borrowed £32.5 million of £40 million available facilities provided by the Royal Bank of Scotland. This comprised £22.5 million of the £30 million revolving credit facility that was drawn throughout the period and a £10 million fixed-term loan, which was novated from Shires, with an interest rate of 3.903% and will expire in May 2027. At the period end, net gearing, allowing for cash held, amounted to 9.6% of net assets, compared to 11.2% at 30 September 2025. Since the period end, the Company has drawn down a further £3.5 million of the revolving credit facility, increasing net gearing to 10.3%.

Premium and discount

From the start of the period the share price generally traded at a premium to NAV. Following the commencement of hostilities in the Gulf on 28 February 2026, the share price underperformed the underlying NAV, and the shares ended the period trading at a discount of 4.6% to the NAV. Since the beginning of April, this has narrowed and the shares were trading at a discount of 2.0% at close of business on 26 May 2026.

There are likely to be a number of contributory factors to this swift move from a premium to a discount. The first is the uncertainty caused by the hostilities in the Gulf, which had a sharp impact on the oil price and resulted in discounts widening across the industry. The second is the end of the tax year. This replicates the experience in 2024, when we saw the share price underperform in March as investors utilised CGT allowances to realise gains. Two years ago, the discount narrowed sharply in April as investors bought back in at the start of the new tax year. There would seem to be some evidence that this is being repeated this year.

Despite this move, the Company's discount continues to be narrower than the average of the sector.

Share Issuance

In order to meet the increased demand for shares in the Company, as evidenced by the premium, the Company issued a further 2.7 million shares during the period, increasing the issued share capital by 5.0%, raising almost £10.4 million of additional capital, and contributing to the Company's organic growth.

In doing so, the Company has now issued all shares previously held in treasury and has successfully applied to the London Stock Exchange for a block admission to enable it to issue a further 2,446,076 shares, should the demand arise. 

Given the strength of the share price relative to the share price relative to NAV, no shares were bought back in the period. The Board continues to monitor the discount closely and will intervene if needed.

Board

Caroline Hitch retired from the Board at the Annual General Meeting in February 2026, having served on the Board for nine years. On behalf of the Board, I would like to record our sincere thanks for her wise counsel and we wish her well.

Simon White, who had been an independent Non-Executive Director on the Board of Shires Income until the merger, joined the Board on 17 March 2026, at the time of the completion of the process. Simon has a background in UK equity fund management and significant experience in the investment trust sector, and we look forward to working with him.

Outlook

The period under review has been characterised by continued uncertainty across global markets, creating a challenging and at times unpredictable backdrop for investors. This heightened volatility reflects a combination of geopolitical tensions and broader macroeconomic pressures, with many economies-including the UK-entering the current period against a backdrop of persistent inflation, subdued growth and fiscal constraints. The UK's reliance on imported energy, together with a fluid political environment, may contribute to further market instability. Against this backdrop, while the precise implications for the Company remain uncertain, the Board continues to monitor developments closely.

This time last year we were writing in the aftermath of Liberation Day, and we had forecast that President Trump's tariff policies might raise the risk of further equity market volatility. While markets seem to have adjusted to the on/off imposition of tariffs by the US, less than 12 months later we are seeing a second bout of volatility caused by the decisions of President Trump, this time arising from escalating tensions in the Middle East following the US and Israeli military action involving Iran. While there are regular announcements that the two sides are negotiating, there does not seem to have been much progress in resolving the impasse in the Straits of Hormuz. The longer the negotiations take, the greater the potential disruption to the global economy as the oil price reached levels not seen since the immediate aftermath of the invasion of Ukraine in 2022. 

As previously explained, the Portfolio Managers' Focus on Change investment approach is well positioned to benefit from periods of heightened volatility, as geopolitical developments can create attractive entry points for well-managed companies that maybe subject to short-term market dislocation.  This has been evidenced over the last six and twelve months and, at the time of writing, the Company continues to perform strongly.  

Performance has been supported in part by the successful merger with Shires Income but has also been underpinned by resilient underlying returns against a challenging market backdrop. Looking ahead, the Board welcomes both the strengthening of the investment team and the broadening of the investment mandate. The Board expects the Portfolio Managers to continue delivering for the enlarged shareholder base, building on the track record achieved in recent years. 

Sarika Patel
Chair
27 May 2026

Our Strategy

Business Model

The Company is an investment trust with a premium listing on the London Stock Exchange.

Investment Objective

The Company's objective is to provide shareholders with a progressive dividend and long-term capital growth from a portfolio invested predominantly in UK listed equities.

Investment Policy

The Directors set the investment policy, which is

·  to invest in a diversified portfolio predominantly invested in UK listed equities.

·  the Company's portfolio will normally comprise between 50 and 70 individual equity holdings; and

·  the Company may invest in preference shares (including convertibles), convertible loan stock, gilts and corporate bonds, and may invest in derivatives for efficient portfolio management and income generation.

Investment Limits

In order to reduce risk in the Company without compromising flexibility:

a)    no holding within the portfolio should exceed 10% of total assets at the time of acquisition.

b)    the top ten holdings within the portfolio will not exceed 50% of net assets.

c)     no holding in any one issuer, including all equity and debt positions, should exceed 10 percent of total assets at the time of acquisition.

d)    a maximum of 20 per cent of total assets may be invested in the equity securities of overseas companies in developed markets at the time of acquisition; and

e)    a maximum of 20 per cent of total assets may be invested in investment grade fixed income bearing securities at the time of acquisition.

Limits in relation to preference shares

1.    A maximum of 7.5 per cent of total assets may be invested in the preference shares of any one company at the time of acquisition; and

2.    The Company may not hold more than 10 per cent of any investee company's preference shares at the time of acquisition.

Limits in relation to traded option contracts

1.     Call options written are to be covered by stock.

2.     Put options written are to be covered by net current assets/borrowing facilities.

3.     Call options are not to be written on more than 10 per cent of the equity portfolio; and

4.     Put options are not to be written on more than 10 per cent of the equity portfolio.

Gearing Policy

The Directors set the gearing policy within which the portfolio is managed. The parameters are that the portfolio should operate between holding 5 per cent net cash and 25 per cent net gearing at the time of drawdown. The Directors have delegated responsibility to the Manager for the operation of the gearing level within the above parameters.

Delivering the Investment Objective

The Board delegates investment management to Aberdeen Group plc ("Aberdeen"). The team within Aberdeen managing the Company's portfolio of investments has been headed up by Thomas Moore since 2011 with Iain Pyle becoming co-manager in March 2026.

Our Strategy

The portfolio is invested on an index-agnostic basis. The process is based on a bottom-up stock-picking approach where sector allocations are a function of the sum of the stock selection decisions, constrained only by appropriate risk control parameters. The aim is to apply the "Focus on Change" process by evaluating changing corporate situations and identifying insights that are not fully recognised by the market.

Idea Generation and Research

The vast majority of the investment insights are generated from information and analysis from one-on-one company meetings. Collectively, more than 3,000 company meetings are conducted annually by Aberdeen. These meetings are used to ascertain the company's own views and expectations of its future prospects and the markets in which it operates. Through actively questioning the senior management and key decision makers of companies, the portfolio managers and analysts look to uncover the key changes affecting the business and the materiality of their impact on company fundamentals within the targeted investment time horizon.

Investment Process in Practice

The index-agnostic approach allows the weightings of holdings to reflect the conviction levels of the investment team, based on an assessment of the management team, the strategy, the prospects and the valuation metrics. The Focus on Change process recognises that some of the best investment opportunities come from under-researched parts of the market, where the breadth and depth of the analyst coverage that the Portfolio Manager can access provides the scope to identify a range of investment opportunities.

The consequence of this is that the Company's portfolio often looks very different from other investment vehicles which aim to provide their investors with access to UK equity income. This is because the process focuses on conviction levels rather than index weightings. This means that the Company may provide a complementary portfolio to the existing portfolios of investors who prefer to make their own decisions and manage their ISAs, SIPPs and personal dealing accounts themselves. At 31 March 2026, 57.6% (30 September 2025: 54.8%) of the Company's portfolio is invested in companies outside the FTSE-100 Index.

The index-agnostic approach, and Focus on Change process, further differentiates the portfolio because it allows the Portfolio Manager to take a view at a thematic level, concentrate the portfolio's holdings in certain areas and avoid others completely. The effect of this approach is that the weightings of the portfolio can be expected to differ significantly from that of any index, and the returns generated by the portfolio may reflect this divergence, particularly in the short term.

Investment Managers' Review

Market Review

It was a positive six-month period for UK equities, with the FTSE All-Share Index returning 8.9% to the end of March 2026. This represented a strong return both in absolute terms and relative to other global equity markets, with the global MSCI ACWI index returning 0.2% over the same period in GBP. This strong market performance came despite a period of continued market and geopolitical volatility.   

Economic data in the UK remained broadly stable but subdued. Official data showed that UK GDP increased by just 0.1% in the last three months of 2025. Although the Chancellor's long-awaited Budget at the end of November contained significant increases in taxation and government spending, it was absorbed calmly by financial markets, which recognised steps taken to control the UK deficit. It did little to stimulate growth, which remained anaemic at the start of 2026, while the unemployment rate rose to a five-year high of 5.2% over the three months to January. More positively, inflation moderated through the period, and the Consumer Prices Index fell back from its summer 2025 peak to reach 3.0% in both January and February. This allowed the Bank of England's Monetary Policy Committee to cut interest rates in December and to leave them unchanged at its meetings in February and March.  

The end of the period saw a significant change in the economic outlook following the start of conflict in Iran on 28 February 2026. Disruption to shipping through the Strait of Hormuz contributed to higher energy prices and increased uncertainty around fuel, fertiliser and wider supply chains across the world. The Bank of England has cited concerns around the inflationary pressure from the conflict and markets began to price in the risk of renewed inflationary pressure and a potentially less accommodative path for interest rates in the months ahead. 

Gains during the period were driven by large-cap stocks, with the FTSE 100 Index reaching an all-time high in February before falling back in March. The FTSE 100 Index returned 9.4% over the six months, a significant outperformance compared to the more domestically focused FTSE 250 Index which returned -3.1%. Large-cap outperformance reflects investor concerns around the domestic outlook, the UK's sector mix, and lower liquidity in the FTSE 250. In our view this has not been driven by a deterioration in mid-cap fundamentals, and we continue to see attractive opportunities.  

The best-performing sector of the UK market has been Energy (+40%). Stocks performed well before March, and the sector moved higher on the Iran conflict, returning +19% in that month alone. In the six months to 31 March, Basic Materials has also been strong (+39%), as commodity prices have increased, reflecting robust demand and a re-rating of hard assets. Healthcare (+27%), Utilities (+23%) and Telecommunications (+24%) all reflected investor desire for defensive assets with predictable long-term cash flows. 

Two sectors stood out as the weak performers. Consumer discretionary names have been consistently weak (-11%), with the UK consumer outlook remaining difficult. The sector sold off particularly in March as inflation concerns returned and interest-sensitive sectors such as housebuilders performed particularly poorly. The weakest performance, however, has come in technology, where concerns around the impact of artificial intelligence (AI) contributed to a material sell-off in early 2026. Latest developments in AI tools have demonstrated the potential to disrupt parts of the software value chain at scale, causing investors to doubt the longevity of their business models. The sector fell almost 30% over the six-month period. We recognised the risks posed by AI-driven disruption, although the repricing has also created selective opportunities.

Revenue Account

Total income generated by the portfolio in the period under review increased by 14.6% to £6.23 million.

On a like-for-like basis, the portfolio generated 7% more income in the period than for the same period in 2025. The balance of the increase, amounting to £404K, is largely attributable to the impact of the merger with Shires Income ("Shires"). While the enlarged portfolio only operated for the final two weeks of the period, it is a critical time for income generation as many of the investee companies declare their final dividend in March and April each year. It is also important to note that the dividend income has been generated entirely from ordinary dividends; for the first time in over 10 years none of the companies paid a special dividend.

Net revenue earnings for the six-month period were also very strong at almost £5.82 million or 19.7% higher than last year's £4.86 million. This position is largely as a consequence of the merger, firstly because of the increased income and secondly because of the contribution that the Manager made to the project through a waiver of management fees equivalent to the project costs of £937,000. This has resulted in a negative management fee for the period. Looking forward, the full year management fee charged to the revenue account will be just over £281,000 lower than would otherwise have been the case as a result of the waiver. 

The preference shares and fixed income instruments added to the portfolio following the merger with Shires Income deliver an additional source of stable income.

Our experience over the last 15 years is that the first half of the Company's financial year generates around 40% of the total dividend income that the portfolio will generate in the full year as many of the holdings declare their final dividend for their previous financial year after the period end. We remain confident that the second half of the year is currently on track to deliver sufficient income to cover the dividend that the Company is aiming to pay.

The dividend outlook of the wider UK equity market will be a function of various factors. One factor is the tendency of management teams to favour share buybacks over special dividends as the preferred method of distributing surplus capital. This partly reflects the view amongst management teams that unusually low valuations make these buybacks particularly accretive to earnings. We note that 28 of the portfolio's holdings, representing 40% of the portfolio, have undertaken a share buyback so far in the current financial year.

Macro variables also play a role in determining dividend payouts. UK economic growth remains sluggish, but there are bright spots within the global economy providing dividend growth opportunities. The Bank of England held the base rate steady at 4.25% throughout the period. The Iran War has had a significant impact on rate expectations, with higher inflation causing money markets to shift from rate cuts to rate hikes. Higher for longer interest rates are affecting companies in different ways, dampening the dividend prospects of consumer and industrial companies, but boosting the dividend prospects of many financials companies. Higher oil and commodity prices are also boosting the dividend prospects of Oil & Gas and Mining stocks.

The diversified nature of the portfolio allows us to have confidence in the total return prospects of the portfolio, with a bedrock of high dividend yield, supplemented by dividend growth and the potential for capital growth over time. We are therefore encouraged to see the continued growth in portfolio income during this period, strengthening our confidence in our ability to extend the 25-year track record of dividend per share growth.

Portfolio Performance

The Company's net asset value ("NAV") total return was 9.9% for the period which outperformed the total return of 8.9% for the Company's reference index. The share price total return was 4.7%. 

FTSE Index total returns

The portfolio's outperformance of the reference index was particularly encouraging given the wide performance gap between the FTSE 100 Index and the rest of the market. We construct the portfolio on an index-agnostic basis, meaning that we size the positions according to our conviction in the idea, rather than anchoring to index weightings. The result is that it is harder for the portfolio to outperform the index when the largest stocks in the index significantly outperform, as they did in this six-month period. Yet the portfolio outperformed despite this headwind, thanks to our success in sector allocation and stock selection.

The single largest contributor to performance was Energy, where the portfolio benefited from the overweight position in the sector, notably the holding in Ithaca Energy, which surged on strong operational delivery, with a significant upgrade to production guidance at the same time as disciplined cost control. The portfolio also benefited from the holdings in BP, Harbour Energy and Diversified Energy, although this was partially offset by the underweight position in Shell.  

The second largest contributor to performance was Financials where the portfolio benefited from strong stock selection, notably the holding in trading platform CMC Markets which raised its earnings guidance and announced further progress in its strategy of becoming a trusted technology provider to banks such as Revolut and Westpac. The holdings in reinsurance company Conduit and Emerging Markets asset manager Ashmore also delivered strong performance as they announced better than expected results.

The third largest contributor to performance was Technology where our caution on highly valued stocks was vindicated, as fears of AI disruption drove a sharp de-rating in stocks such as RELX and Sage. Towards the end of the period, we took advantage of this weakness by making selective purchases in this sector.

In Basic Materials, the portfolio benefited from the very large holding in Rio Tinto - which we had added to in August and September 2025 - as the company announced record-breaking production volumes and strategic progress on major growth projects, notably the Oyu Tolgoi underground copper mine in Mongolia.

Partially offsetting these strong performers, performance relative to the reference index was hit by the underweight position in Pharmaceuticals, notably AstraZeneca and GSK which benefited from various product approvals and clinical trial results. Within Consumer Discretionary, performance was hit by the holdings in easyJet and Barratt Redrow both of which struggled against the backdrop of rising input prices and lacklustre consumer demand. The Real Estate holdings, including British Land, suffered as valuations were constrained by the impact of rising bond yields.

Activity

Following the completion of the merger with Shires Income PLC in March, the portfolio now reflects the enlarged Company's increased scale and broadened opportunity set. During the period we identified a range of new investment opportunities to help support each aspect of the investment objective - dividend yield, dividend growth and capital growth.

The largest purchases during the period can be categorised into the following groupings:

1.     Mining and Oil & gas stocks whose valuations do not capture their cash flow potential:

·  Rio Tinto: Early in the six-month period, we added to the holding in Rio Tinto where we see potential to grow earnings from copper, aluminium and lithium following a period of heavy investment in these areas, reducing its dependence on the iron
ore price.

·  Glencore: Against the backdrop of geopolitical turmoil, we see Glencore as well-positioned to achieve upgrades to earnings and cash flows as tight gas markets drive thermal coal prices, while its marketing division should benefit from rising spreads. There is also the possibility that Glencore will attract further M&A interest in due course, as the management team has indicated that it is open to offers at the right price.

·  Bluenord: We started a new holding in this high-yield Norwegian-listed Danish oil and gas business which co-owns its North Sea assets with the Danish Government and Total Energies. We are impressed by the management team's focus on disciplined capital allocation and maximising shareholder distributions. We also see potential for the company's concessions to be extended beyond their expiry date of 2042, as energy security moves up the political agenda across Europe.

2.     Change situations where underlying growth potential has been ignored:

·   Softcat: Following an aggressive sell-off driven by AI disruption fears, we started a new holding in Softcat. We are confident in Softcat's AI resilience in the context of its ability to assist small and medium-sized customers and public sector bodies navigate the complexity of IT infrastructure at a time of rapid technological change.

·   Diageo: The stock is heavily out of favour due to post-Covid demand normalisation and resultant inventory correction. We expect the appointment of Sir Dave Lewis (ex-Tesco and Unilever) as new CEO to deliver an effective turnaround, leveraging his expertise in managing operational efficiency, costs, marketing and brand-building.

·   British Land: We started a new holding in British Land which is benefiting from improving occupational trends in London offices and UK retail parks. A period of minimal new floor space since Covid, coupled with improving demand trends has resulted in a sharp reduction in vacancy rates, which tends to be the precursor to a surge in rental growth.

3.     Financials with potential to thrive against a tough geopolitical backdrop:

·  TP ICAP: We added to the holding in TP ICAP which is benefiting from buoyant conditions, supporting revenue and earnings upgrades, while also investing in longer-term growth initiatives including monetising its data and analytics capabilities and rolling out new electronic trading platforms. 

·  Polar Capital: Polar Capital's return to net inflows is driving a return to positive earnings momentum and consequently full dividend cover. We believe the valuation has scope for re-rating given the attractions of its focused business model and strong balance sheet, making this an unusual opportunity that combines income and growth.

The largest sales during the period can be categorised into the following groupings:

1.     Taking profits in stocks whose investment thesis has played out:

·  Johnson Matthey: We progressively sold the holding in Johnson Matthey during the six-month period. In February, the Company announced that Honeywell had negotiated revised terms in its acquisition of Johnson Matthey's Catalyst Technologies business, against the backdrop of rising input costs and slowing demand.

·  Balfour Beatty: We took some profits in the holding in Balfour Beatty following a period of strong performance since initial purchase in October 2024. The share price responded positively to growing evidence of long-term infrastructure demand, helping underpin consistent expansion in the order book and delivery of profitable growth.

·  National Grid: We sold the holding in National Grid, using it as a source of funds for new investments, having re-rated to a valuation that appeared to offer limited further upside.

·  AstraZeneca: We sold the holding in AstraZeneca following a period of strong performance. The share price responded positively to successful delivery of oncology portfolio driving revenue growth, helped by the wider market rotation into defensive stocks.

2.     Exiting shares that received M&A bids:

·  Petershill Partners: We have seen bid announcements for 7 of the portfolio holdings since the beginning of FY24. We see this M&A activity as a sign of our success in identifying the gap that exists between share prices and intrinsic value. We sold the holding in Petershill Partners after it received a bid from Goldman Sachs at a 34% premium.

3.     Eliminating holdings that lack the catalysts
necessary for a re-rating:

·  Berkeley Group: We sold the holding in Berkeley Group as the London housing market remains burdened by high levels of regulation and taxation, as well as low levels of affordability, causing house prices to remain subdued. This challenging environment has led to Berkeley guiding to no profit growth throughout 2026 and 2027.

·  Energean: We sold the holding in Energean, where we saw some balance sheet risk as cash flow disappointed, reducing the firm's ability to de-leverage. Heightened regional tensions have also been unhelpful, with Energean suspending operations at Karish (offshore Israel) following the ramp up of Iranian action around the region.

Outlook

World equity markets have to date remained resilient in the face of geopolitical instability, most recently the Iran War and closure of the Strait of Hormuz.  The economic impact of these events will depend on how long these tensions persist. Inflation was already elevated before the Iran War due to the impact of tariffs. What is clear is that inflation is set to remain higher for longer, putting pressure on central banks to keep interest rates elevated. While this may at first glance appear to be an unwelcome scenario for global equity markets, it also creates an opportunity for active stock pickers to identify winners and avoid losers. By carefully positioning the portfolio for this environment, we are finding plenty of stocks whose earnings and dividend prospects remain positive, and this is helping us deliver robust capital growth.

This market backdrop - higher for longer inflation and interest rates - remains supportive for value stocks, including higher yield stocks. We continue to find many attractive businesses offering dividend yields in excess of 5%, alongside share buybacks, and we are also seeing value emerge in sectors where it was previously less evident.  By contrast, this has been a perfect storm for growth stocks. Higher interest rate expectations disproportionately hit the valuation investors will pay for growth companies, as so much of their value lies in the outer years. A small increase in rate expectations can have a dramatic effect in the fair value calculated by Discounted Cash Flow models. At the same time, many growth stocks have been hit by fears that new competition could use Artificial Intelligence to disrupt their moat, damaging their profitability. The indiscriminate nature of this sell-off, across a wide range of stocks, has allowed us to identify some attractive stock-level opportunities. While it is true that some companies will struggle during this period of technological change, others will remain far more resilient than their valuations currently imply, allowing us to diversify the portfolio into stocks that would not previously have met our investment criteria. Our investment process is designed to seek out the most compelling value opportunities in the equity market, wherever that is. This requires us to remain nimble as our opportunity set is constantly evolving.

Within the UK equity market, investors have continued to favour the constituents of the FTSE 100 Index, as reflected in the continued outperformance of large cap stocks over small and mid-cap stocks during the period under review. Our portfolio is well diversified across the market cap spectrum. We recognise that larger companies can offer defensive characteristics which can support them during periods of geopolitical turbulence, but we also remain mindful that large cap stocks typically trade on higher valuations than their small and mid-cap peers. One reason for this valuation gap is that larger companies tend to be more internationally orientated, allaying investor fears over the impact of the UK's prolonged economic stagnation. Given the backdrop of UK political instability, we take seriously the risk of a doom loop in which low economic growth requires the Government to keep raising taxes and borrowing, testing the patience of voters and bond markets. The good news is that we are finding attractively valued stocks that are not directly dependent on the UK economy, partly because they are more exposed to "needs" than "wants" and partly because they are internationally diversified. Our go-anywhere mindset has been further enhanced since the merger with Shires, as we now have the ability to invest in overseas stocks and bonds. One of our case studies, later in this report, covers our investment rationale for holding a French stock, Gaztransport & Technigaz. We believe this stock offers exposure that could not replicated within the UK equity market, underlining the benefit to shareholders of this enhancement. 

Our focus remains on delivering on the mission we have set out, namely constructing a portfolio that has the potential to deliver an attractive dividend yield, dividend growth and capital growth. The evidence from the period under review is that we are winning on all three fronts, strengthening our confidence in our ability to announce a 26th consecutive year of dividend per share growth when we report our full year results later in the year. By getting the basics right - choosing companies that are generating the cash flow to pay attractive dividends and buy back their own shares - we are also being rewarded with rising share prices which are translating into excellent capital growth for our shareholders. Whatever the geopolitics brings, we will remain alert to the opportunities as they arise, enabling us to keep the portfolio match fit.

abrdn Investments Limited
27 May 2026

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